Unemployment may be classified into several categories depending on the underlying causes.
Real wage unemployment:
This type of unemployment is caused when the supply of labour exceeds the demand for labour, but real wages do not fall for the labour market to clear.
This type of unemployment is normally caused by strong trade unions which resist a fall in their wages. Another cause of this type of unemployment is the minimum wage rate, when it is set above the market clearing level.
It is inevitable that some unemployment is caused not so much because there are not enough jobs to go round, but because of the friction in the labour market (difficulty in matching quickly workers with jobs), caused perhaps by a lack of knowledge about job opportunities.
In general, it takes time to match prospective employees with employers, and individuals will be unemployed during the search period for a new job. Frictional unemployment is temporary, lasting for the period of transition from one job to the next.
This occurs in certain industries, for example building, tourism and farming, where the demand for labour fluctuates in seasonal patterns throughout the year.
This occurs where long-term changes occur in the conditions of an industry. A feature of structural unemployment is high regional unemployment in the location of the industry affected. The primary cause is a significant reduction in the level of demand.
This is a form of structural unemployment, which occurs when new technologies are introduced.
- Old skills are no longer required.
- There is likely to be a labour saving aspect, with machines doing the job that people used to do.
With automation, employment levels in an industry can fall sharply, even when the industry’s total output is increasing.
Cyclical or demand-deficient:
It has been the experience of the past that domestic and foreign trade go through cycles of boom, decline, recession, recovery, then boom again, and so on.
- During recovery and boom years, the demand for output and jobs is high, and unemployment is low.
- During decline and recession years, the demand for output and jobs falls, and unemployment rises to a high level.
Cyclical unemployment can be long-term, and a government might try to reduce it by doing what it can to minimize a recession or to encourage faster economic growth.